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  • Transformation in light of automotive disruption

    December 2017

    Global Automotive Supplier Study 2018

  • 2 Global Automotive Supplier Study 2018.pptx

    Contents

    This document shall be treated as confidential. It has been compiled for the exclusive, internal use by our client and is not complete without the underlying detail analyses and the oral presentation.

    It may not be passed on and/or may not be made available to third parties without prior written consent from and .

    Roland Berger/Lazard

    The status

    Record volumes and profits, but key markets are at a tipping point

    A The consequence

    Automotive suppliers need to transform their business models

    D

    Roland Berger and Lazard Automotive teams

    The Contacts

    E The challenge

    Suppliers' traditional business will be questioned on multiple levels

    C The future

    Upcoming automotive disruption will fundamentally change the industry

    B

  • 3 Global Automotive Supplier Study 2018.pptx Source: Lazard, Roland Berger

    Executive Summary (1/2)

    > The automotive industry has seen a continuation of global growth in 2017 However, first signs of weakening are visible with softening of growth in China and Europe and a slight volume decline in the US

    > In this still favorable environment, the global supplier industry is expected to increase its revenues by 3% and maintain its profitability level with an average EBIT margin of ~7% in 2017

    Chinese and NAFTA suppliers are currently more profitable than the global average

    Exterior, chassis and tire suppliers are on track to improve their EBIT margin profile in 2017

    Powertrain suppliers continue to see their margins under pressure due to intensified competition and the cost of innovation

    > For 2018, we expect continued growth for the global supplier base, but at a slower pace with stable EBIT margins

    > The four automotive megatrends Mobility, Autonomous driving, Digitization and Electrification will continue to change the automotive industry, causing disturbance in all supplier domains

    New mobility business models are poised to disrupt car ownership, personal mobility and goods logistics: The share of new vehicle sales for application in the field of new mobility (e.g. ride hailing, car sharing) may range between 10-15% in the US and Europe and up to 35% in China by 2025

    The timeline for level 4/5 autonomous keeps accelerating as necessary economics, regulations and technology fall into place: Penetration rates for autonomous cars (SAE level 4/5) may reach a level between 5% and 26% in ~15-20 years

    In digitization, artificial intelligence offers almost limitless possibilities while connectivity-enabled technologies are reaching mainstream application: Within the next 10 years almost all cars in mature markets will have some form of connectivity

    Momentum for electrification is building among OEMs due to increasing regulatory pressure and accelerating technology advancement: Scenarios for the share of EV cars in 2025 range from 8-20% in the US, 20-32% in Europe and 29-47% in China

  • 4 Global Automotive Supplier Study 2018.pptx Source: Lazard, Roland Berger

    Executive Summary (2/2)

    > Suppliers are expected to face five main challenges going forward

    Slowing growth will put pressure on margins and create a need to find new ways to grow

    Accelerated change of technological focus requires further investment into new technologies such as ADAS and electrification, putting an undue burden without a promise of quick returns

    Emergence of software as key differentiator will make many existing competencies obsolete and create more intensive competition from new tech players

    Commoditization of hardware parts and disaggregation of systems will exert additional pressure to reduce cost and increase operational efficiency

    Potential downswing of valuations for commoditized suppliers in the midterm might go along with growing investor pressure to increase shareholder value

    > In order to succeed in the new automotive environment, suppliers will have to transform their existing business models

    Rethink overall strategy in order to either capture new growth opportunities or consolidate the market around the existing portfolio

    Define a long term technology roadmap and strategic positioning in the value chain regarding both product and service offering

    Implement a lower operating cost base and ensure sufficient financing for the upcoming transition at the same time

    Adapt organizational structure and governance model to successfully manage new emerging technologies and competencies alongside old declining technologies under one roof

    Create a new company mindset and culture to foster innovation which is of paramount importance to compete in the new technology areas

    Build up new partnerships and leverage this ecosystem to find new ways to innovate

  • 5 Global Automotive Supplier Study 2018.pptx

    Contents

    This document shall be treated as confidential. It has been compiled for the exclusive, internal use by our client and is not complete without the underlying detail analyses and the oral presentation.

    It may not be passed on and/or may not be made available to third parties without prior written consent from and .

    Roland Berger/Lazard

    The status

    Record volumes and profits, but key markets are at a tipping point

    A The consequence

    Automotive suppliers need to transform their business models

    D

    Roland Berger and Lazard Automotive teams

    The Contacts

    E The challenge

    Suppliers' traditional business will be questioned on multiple levels

    C The future

    Upcoming automotive disruption will fundamentally change the industry

    B

  • 6 Global Automotive Supplier Study 2018.pptx

    The automotive industry recently has been more in the public eye than ever before

    Recent notable automotive headlines

    Source: Lazard, Roland Berger

    - The New York Times

    - The New York Times

    - Forbes

    - ZDNet

    - Associated Press

    - Reuters

    - Automotive News Europe

    - The Washington Post

    - Reuters

    - Automotive News Europe

    - Automotive News Europe

    - Reuters

    - Bloomberg News

    - Reuters

    - Wired

    - Autocar

    - The Wall Street Journal

  • 7 Global Automotive Supplier Study 2018.pptx

    7

    The industry had another year of record volumes, however slowing growth on global level with North America on the decline

    World

    NAFTA Europe3) China4)

    Japan/Korea

    CAGR2): 3.7% CAGR2): 4.3% CAGR2): 10.2%

    CAGR2): 3.4% CAGR2):-1.9%

    17.4

    -3%

    2016

    17.8

    2015

    17.5

    2014

    17.0

    2017e 2013 2012

    16.2 15.4 18.1 16.9

    2013 2012

    16.0 15.8

    2014

    +2%

    2017e

    19.1

    2016

    18.8

    2015 2015

    27.6 23.0

    2016

    18.6

    +1%

    2014 2013

    27.4

    2017e

    21.3

    2012

    24.0

    South America

    CAGR2): -10.6%

    4.3

    2012 2014 2017e

    2.7

    2016

    3.8 3.1 4.5

    +14%

    3.1

    2015 2013

    13.7

    2013 2017e

    13.5

    2016

    12.9

    2015

    13.3

    +4%

    2014

    13.5 13.9

    2012

    +2%

    2017e

    94.9

    2016

    93.1

    2015

    88.8 81.5

    2013 2014

    87.4 84.7

    2012

    Global light vehicle production volume1) by region, 2012-2017e [m units]

    Source: IHS, Lazard, Roland Berger

    1) Incl. light commercial vehicles; 2) CAGR 2012-2016; 3) Excluding CIS and Turkey; 4) Greater China

  • 8 Global Automotive Supplier Study 2018.pptx

    -15

    -10

    -5

    0

    5

    10

    15

    20

    11 10 9 8 7 5 4 3 2 1 0 6 28

    Thailand

    United Kingdom

    Turkey

    Iran Russia

    Czech Republic

    Indonesia

    Italy

    Slovakia

    Canada

    France

    Brazil

    Spain

    Mexico

    South Korea

    India

    Germany

    Japan

    United States

    China

    -25

    -20

    -15

    -10

    -5

    0

    5

    10

    15

    20

    25

    30

    0 11 10 9 8 7 6 5 4 3 2 1

    Geely

    SAIC-GM-Wuling

    BMW

    Daimler

    Suzuki

    FCA

    Honda

    Ford GM

    Hyundai

    R-N

    Toyota

    VW

    PSA

    Dongfeng

    Tata

    Great Wall BAIC Mazda

    Changan

    Winners

    In 2017, the U.S. and Canada experienced significant declines Mexican and Japanese production driving global production growth

    Production 2017e vs. 2016 [%]2)

    Avg. 2.0%

    By production country By OEM group

    Total production 2017e [m units]

    Winners

    Losers Losers

    Top 20 by country and by OEM group, light vehicle production1)

    Source: IHS, Lazard, Roland Berger

    1) Incl. light commercial vehicles; 2) Year-on-year growth rate

  • 9 Global Automotive Supplier Study 2018.pptx Source: Company information, analyst forecasts, Lazard, Roland Berger

    2017 was another good year for suppliers with moderate growth and margins comparable to previous years

    Revenue growth EBIT1) margin [%]

    33555413

    29

    142138131

    124118

    113

    100

    2012 2010 2011 2013 2014 2017e 2015

    ~147

    2016

    7.27.07.37.1

    6.86.87.1

    2015 2017e

    ~7.3

    2012 2013 2010 2011 2014 2016

    Key supplier performance indicators, 2010-2017e (n=~650 suppliers)

    1) EBIT after restructuring items

    Indexed [2010=100]

    YoY [%]

  • 10 Global Automotive Supplier Study 2018.pptx

    10-y- = 6.2x2)

    The overall positive sentiment was also reflected in the supplier valuation levels that still trade above their long-term average

    Source: Factset, Lazard, Roland Berger

    EV/EBITDA NTM1)

    1x

    3x

    5x

    7x

    9x

    11x

    Nov

    -07

    Nov

    -08

    Nov

    -09

    Nov

    -10

    Nov

    -11

    Nov

    -12

    Nov

    -13

    Nov

    -14

    Nov

    -15

    Oct

    -16

    Nov

    -17

    > Valuation multiples of publicly listed automotive suppliers are above their long-term average values, however, below peak values observed during the last two to three years

    > High valuation levels are supported by an abundance of cheap liquidity on the global stock markets as well as profitable growth of automotive suppliers. More recently, the question around the impact of a changing automotive environment had a muting effect on valuations

    > While European and North American suppliers trade at similar valuation levels, Japanese companies continue to trade at a discount, reflecting the stagnation in their home market

    Japanese suppliers3) European suppliers4) North American suppliers5)

    10-y- = 5.8x2)

    10-y- = 4.4x2)

    Impacted by the economic crisis

    Evolution of automotive supplier valuations

    1) NTM = Next twelve months; 2) Excluding the distorting impact of the economic crisis (Jan-Dec 2009 multiples); 3) Aisin Seiki, Bridgestone, Calsonic Kansei, Denso, Exedy, JTEKT, Keihin, Koito, Mitsuba, NHK Spring, NSK, Stanley Electric, Showa, Sumitomo Riko, Takata, Tokai Rika, Toyoda Gosei, Toyota Boshoku and TS Tech; 4) American Axle, BorgWarner, Cummins, Dana, Delphi, Federal-Mogul, Iochpe Maxion, Johnson Controls, Lear, Magna, Martinrea, Meritor, Tenneco, Tower, Visteon and Wabco; 5) Autoliv, Autoneum, Brembo, CIE, Continental, ElringKlinger, Faurecia, Georg Fischer, Grammer, Haldex, Hella, Leoni, Norma, Plastic Omnium, PWO, SHW, SKF, Stabilus, and Valeo

  • 11 Global Automotive Supplier Study 2018.pptx

    11

    Financial performance of suppliers varies greatly depending on region, company size, product focus and business model

    Source: Company information, Lazard, Roland Berger

    > Chinese-based suppliers currently achieve the highest margins with ~9% EBIT

    > NAFTA-based suppliers profit from their previous restructuring efforts and re-focusing on technology

    > European supplier margins have increased only marginally and are currently close to the average supplier universe values

    > Japanese/Korean suppliers remain at a low margin level of ~6% EBIT

    > Large suppliers with >EUR 10 bn revenues maintain strong margins of ~7.5% EBIT

    > Midsized suppliers (EUR 1.0 to 2.5 bn revenues) show strong and very profitable growth

    > Upper midsized suppliers (EUR 2.5 to 5 bn revenues) below average regarding profitability

    > Small suppliers (below EUR 0.5 bn revenues) lag behind in terms of growth and profitability

    > Chassis suppliers clearly improved margins to ~8% EBIT driven by ADAS and active safety

    > Tire suppliers maintained strong margins due to favorable raw material costs

    > Powertrain suppliers gradually lost ground and achieve below-average margins in the meantime

    > Interior suppliers still trail their peers, with recently even lower margins

    > Product innovators are strongly growing and generating stable above-average margins of >7% EBIT based on technology leadership translated into higher prices

    > Process specialists continue to face below average margins of ~6-7% EBIT due to a lower innovation level and higher competitive pressure

    Region Company size Product focus Business model 1 2 3 4 Profitability trends in the global automotive supplier industry 2010 vs. 2017e

  • 12 Global Automotive Supplier Study 2018.pptx

    11.7

    7.5 6.9

    8.5

    5.5

    ~8.7 ~8.3

    ~7.2

    ~6.5 ~6.3

    China- and NAFTA-based suppliers are currently more profitable than the average China-based suppliers recently on the decline

    Source: Company information, Lazard, Roland Berger

    Japan South

    Korea

    Europe NAFTA China

    2017e 2010

    Revenue CAGR 2010-2017e

    EBIT margin 2010-2017e

    1 Region

    2017e = 7.3

    ~11.9% ~3.0% ~6.9% ~7.2% ~5.1% > China-based suppliers have seen a decline in margins in recent years from a very high level due to intensified competition in their home market, but still achieve above average growth and profitability

    > NAFTA-based suppliers are still leveraging the effects from their substantial restructuring during the 2008/2009 auto crisis and the subsequent re-focusing on technology

    > Europe-based suppliers largely benefit from leading technology positions in many segments and a favorable customer mix

    > South-Korea-based suppliers' margins have come under pressure recently

    > Japan-based suppliers have seen a slight recovery in terms of profitability, reducing the gap to other regions

    Key supplier performance indicators by region, 2010 vs. 2017e [%]

  • 13 Global Automotive Supplier Study 2018.pptx

    7.2 6.9

    7.3

    8.4

    6.3

    7.0

    ~5.5

    ~7.2

    ~8.6

    ~6.9 ~6.6

    ~7.5

    2 Company size

    Source: Company information, Lazard, Roland Berger

    > Large multinational suppliers (above EUR 10 bn revenues) grew in line with the average, but have been able to achieve above average profitability

    > Large suppliers (EUR 2.5-5 bn revenues) gave up profitability to continue strong revenue growth

    > Midsize suppliers (EUR 1.0-2.5 bn revenues) increased profitability, mostly on the back of a very focused and technology-enabled product portfolio

    > Very small suppliers lag behind in terms of growth and profitability due to limited resources for innovation and expansion

    >10.0

  • 14 Global Automotive Supplier Study 2018.pptx

    6.6 6.8

    7.3 7.6 7.3

    5.9

    ~11.5

    ~8.0

    ~6.4

    ~7.8

    ~6.1

    ~5.5

    Powertrain suppliers face increasing pressure on profitability Exterior suppliers strongly grow at attractive margins

    Source: Company information, Lazard, Roland Berger

    3 Product focus

    > Tire suppliers grew at a slower rate, but benefited from recently favorable raw material costs

    > Chassis suppliers clearly improved margins over time development increasingly driven by advanced driver assistance and active safety

    > Powertrain margins pressurized by intensified competition, the cost of (multiple) innovations and the rise of electric vehicles

    > Exterior suppliers have been strongly growing while continuing to be profitable above average due to growing lightweight focus

    > Electrics/Infotainment suppliers face changing customer requirements and increased competition, reducing profitability

    > Interior suppliers' margins continue to stay under pressure

    Electrics/

    Infotainm.

    Exterior Chassis Power-

    train

    Interior Tires

    ~2.9% ~4.9% ~6.0% ~7.4% ~5.6% ~5.6%

    2017e 2010

    Revenue CAGR 2010-2017e

    EBIT margin 2010-2017e

    2017e = 7.3

    Key supplier performance indicators by product focus, 2010 vs. 2017e [%]

  • 15 Global Automotive Supplier Study 2018.pptx

    7.7

    6.7

    ~7.2

    ~6.7

    Product innovators outpace process specialists in terms of profitability and growth

    Source: Company information, Lazard, Roland Berger

    4 Business model

    > On average, innovative products feature higher differentiation potential and greater OEM willingness to pay higher prices

    > High entry barriers through intellectual property in many innovation-driven segments

    > Competitive structure more consolidated in innovation-driven segments

    > Higher fragmentation in many process-driven segments puts pressure on prices

    > Product innovators grow slightly above process specialist due to increasing demand for innovative products and solutions

    Process specialists2) Product innovators1)

    ~6.4% ~5.5%

    2017e 2010

    Revenue CAGR 2010-2017e

    EBIT margin 2010-2017e

    Key supplier performance indicators by business model, 2010 vs. 2017e [%]

    Note: Analysis excludes tire suppliers; 1) Business model based on innovative products with differentiation potential; 2) Business model based on process expertise (while product differentiation potential is limited)

  • 16 Global Automotive Supplier Study 2018.pptx

    100

    122 132

    149

    163

    180

    194

    100 112 112

    118 120 119 116

    Margins of top-performing suppliers expected to stay at previously high levels Low-performing peers still significantly lagging behind

    8.2 8.0 8.3 8.3

    8.7

    9.2 9.6

    5.6 5.1

    4.3

    5.3

    6.1

    5.3 4.9

    Revenue growth [2010=100] EBIT2) margin [%]

    Low

    Top

    Source: Company information, Lazard, Roland Berger

    Low

    Top

    2010 2011 2012 2013 2014 2015 2016 2017e 2010 2011 2012 2013 2014 2015 2016 2017e

    Key performance indicators of top vs. low performing suppliers1)

    1) Top (low) performance based on above- (below-) average revenue growth 2010-2016, ROCE 2010-2016 and ROCE 2016; 2) EBIT after restructuring items

  • 17 Global Automotive Supplier Study 2018.pptx

    0

    1

    2

    3

    4

    5

    6

    7

    8

    9

    10

    11

    12

    13

    14

    0 1 2 3 4 5 6 7 8 9 10 11 12 13

    However, top performance is not necessarily related to (product) innovation only

    Source: Company information, Lazard, Roland Berger

    Rev

    enu

    es C

    AG

    R 2

    010-

    2017

    e

    Low product

    innovators

    Top process

    specialists

    Low process

    specialists

    Top product

    innovators

    Avg. EBIT2) margin 2010-2017e

    > Product innovators outperform process specialists in terms of average profitability

    > Top process specialists, though, achieve average revenue growth that is above the top product innovators

    > Large difference in growth rates between top and low performing process specialists indicates the relevance of scale economies

    > Increased difference in growth rates between top and low performing product innovators indicates the relevance of profitable innovation

    5.7%

    7.3%

    Key performance indicators of top vs. low performing suppliers1)

    1) Top (low) performance based on above- (below-) average revenue growth 2010-2016, ROCE 2010-2016 and ROCE 2016; 2) EBIT after restructuring items

  • 18 Global Automotive Supplier Study 2018.pptx

    7.1 6.8 6.8

    7.1 7.3 7.0 7.2 ~7.3

    17e 13 11 10 14 16 15 12 18e 18e 17e 13 16 11 10 15 14 12

    Short term, we expect continued, but slower revenue growth and comparable margins to 2017e

    Production volume [m units]

    Main revenue drivers

    > Slowing growth in mature markets (US, Europe, Japan/Korea)

    > Continued softening of growth in China

    > Strong growth in South America, Russia, Turkey and Middle East partially counteract slowdown in major markets

    Revenue growth [2010 = 100] EBIT1) margin [%]

    Main EBIT drivers

    > Relatively stable top-line

    > Political and macroeconomic environment expected to remain stable with growing downside risks

    > Product innovators continue to translate technology leadership to favorable pricing

    NAFTA Europe2)

    China3) Japan/Korea

    S. America World

    17.5

    18e

    +1%

    17e 16

    17.8 17.4

    +1%

    19.3

    18e

    19.1

    16

    18.8

    17e

    +1%

    18e

    27.9 27.4

    16

    27.6

    17e

    13.5

    -3%

    13.0

    17e 16

    12.9

    18e

    3.1

    +10%

    18e 17e 16

    2.7 3.4

    96.2

    18e

    +1%

    17e

    94.9 93.1

    16

    100

    113 118

    124 131

    138 142

    ~147

    Supplier global revenue and margin outlook 2017e/2018e

    1) EBIT after restructuring items; 2) Excluding CIS and Turkey; 3) Greater China

    Source: IHS, company information, Lazard, Roland Berger

  • 19 Global Automotive Supplier Study 2018.pptx

    Contents

    This document shall be treated as confidential. It has been compiled for the exclusive, internal use by our client and is not complete without the underlying detail analyses and the oral presentation.

    It may not be passed on and/or may not be made available to third parties without prior written consent from and .

    Roland Berger/Lazard

    The status

    Record volumes and profits, but key markets are at a tipping point

    A The consequence

    Automotive suppliers need to transform their business models

    D

    Roland Berger and Lazard Automotive teams

    The Contacts

    E The challenge

    Suppliers' traditional business will be questioned on multiple levels

    C The future

    Upcoming automotive disruption will fundamentally change the industry

    B

  • 20 Global Automotive Supplier Study 2018.pptx

    Looking ahead: Several industry trends are influencing the automotive industry in the short and long term

    Car buyers

    OEMs

    Competition Supply base

    Capital markets/ financing

    Technology/ legislation

    Long-term Short-term

    Volatility of capital markets

    "Zero casualties"

    Rising energy costs

    Availability of skilled workforce

    Supplier insolvencies

    Factor cost inflation

    Selective consolidation

    "Rising star OEMs"

    Global localization

    Price pressure

    Volume bundling

    Emerging market

    investors

    New growth regions

    Continued outsourcing

    ADAS/ automated

    driving

    Further reduced

    emissions

    Comfort features

    New players

    (hardware and

    software)

    Volatility of exchange

    rates

    Demotorization

    Digital technologies

    Triad stagnation

    Investors' and banks' view

    on auto suppliers

    New mobility concepts

    Terms & conditions

    Further reduced CO2

    targets

    Potential downturn

    Diesel

    Industry 4.0 New customers (IT/tech space)

    Brexit

    Automotive industry trend radar

    Note: Excluding product segment specific technology and operational issues

    Source: Lazard, Roland Berger

  • 21 Global Automotive Supplier Study 2018.pptx

    Ride sharing services are forecast to continue to grow at a fast pace, attracting massive capital paired with high valuations

    Capital raised by industry leaders [USD bn]1)

    114bn Combined valuation

    Mobility

    Latest reported valuation (pre money) [USD bn]

    11.6 > USD 10 bn potential investment led

    by Softbank > Ride requests up 150% YOY

    59.0 > Based on the last equity investment round in

    June 2016 > However, secondary market interest pegged the

    value closer to USD 50 bn in June 2017

    15.7

    > USD 5 bn raised in latest round led by Softbank

    > Expanding internationally as a strategic investor

    44.5 > Based on its April 2017 equity investment round

    led by Softbank

    3.6 > USD 1 bn raised in latest investment

    round led by Alphabet's CapitalG

    > 1H 2017 saw as many rides as all of 2016

    10.0 > Based on its October 2017 investment round

    led by CapitalG

    Didi Chuxing

    Lyft

    Uber

    State of the ride hailing industry

    1) Announced investments as of November 2017

    Source: Crunchbase, desktop research, Lazard, Roland Berger

  • 22 Global Automotive Supplier Study 2018.pptx

    Vehicle sales for new mobility services are expected to exceed 10% of new car sales by 2025 in the US and the EU

    98%92% 90%

    8% 10%

    2025 2020 2015

    2%

    Other New mobility1)

    > New mobility sales are expected to grow through 2025 due to:

    Changes in car ownership patterns

    Growing urbanization

    Enhancements in technology & mobility business models

    > The disruption potential in China is higher due to its relatively lower base of ownership levels today (1 car for 7 people vs. 1 for 2 in EU and 1 for 1.25 in US)

    > Post 2025, the introduction of RoboCabs could drive a significantly larger share of sales to new mobility

    98%91%

    85%

    9%15%

    2025 2020 2015

    2%

    United States EU-28

    97%91%

    65%

    9%

    35%

    2025

    3%

    2015 2020

    China

    Share of vehicle sales for New Mobility1) [% passenger car sales]

    1) Includes forecast for car sharing, ride hailing, ride sharing, and Robocabs. Does not include sales for conventional taxis or rental car fleets

    Source: Global RB Mobility Revenue and Profit Pool Model, Lazard, Roland Berger

    Mobility

  • 23 Global Automotive Supplier Study 2018.pptx

    23

    Automated driving is set to arrive at fast pace With new entrants and real-life pilots already under way

    Level 1,& 2 (Driver assistance and partial automation)

    Parking assist (steering only)

    BSD2), Lane departure warning,

    Lane keeping assist

    Collision warning

    Adaptive cruise control (no steering)

    Driver monitoring

    Night vision

    Traffic signal recognition

    Level 3 (Conditional automation)

    Level 4/5 (High/Full automation)

    2017 2010 2025 2020

    AEB3) w evasive steering assist AEB3) AEB3) w pedestrian detection

    Traffic jam assist ACC4) + steering (Driver must monitor road)

    "Parking with App"

    Remote valet parking Highway pilot

    Urban pilot

    Current Short-term Mid/long term "Moonshot" Automation level (NHTSA)

    Traffic jam pilot

    Light vehicles Commercial vehicles (where significantly different from light vehicle timing)

    Construction zone assist (LV)

    Highway chauffeur (ACC4) w steering & system monitors road)

    Platooning

    Lane keeping

    Intersection assist

    Emergency cut-off

    Exit-to-Exit

    Autonomous driving

    Construction zone assist (CV)

    Commercialization timeline of automated driving functionality by SAE1) levels

    1) Society of Automotive Engineers; 2) Blind spot detection; 3) Automated emergency braking; 4) Advanced cruise control

    Source: Lazard, Roland Berger

  • 24 Global Automotive Supplier Study 2018.pptx

    26%

    5%

    2030/2035 2020 2025

    Automated driving penetration primarily in flagship premium models

    > Continued use of human drivers renders ride sharing services' business models mostly unsustainable

    Low scenario

    > Sharing proliferates with high acceptance of car/ride sharing services

    > High penetration of autonomous vehicles in shared fleets and privately owned premium and volume vehicle segments

    > Autonomous, shared vehicles, called RoboCabs provide on-demand mobility services to consumers and businesses

    > High use of autonomous vehicles by ride sharing services drives down costs significantly

    Disruptive/High scenario

    Autonomous driving Penetration rate of highly automated cars (SAE Levels 4/5)1)

    1) In % passenger car sales; includes RoboCabs and private autonomous cars

    Source: Global RB Mobility Revenue and Profit Pool Model, Lazard, Roland Berger

    Autonomous driving

  • 25 Global Automotive Supplier Study 2018.pptx

    An increasing share of vehicles will be connected globally Digitization as enabler for new business models and technologies

    Digitization

    2015 2020 2025

    41%

    57%

    95% Regions included > North America > Europe > Japan/Korea > Greater China

    Calc.2) Data Type

    Smartphone-based

    > Connectivity and calculation power provided by smartphone

    Tethered

    > Connectivity provided by smartphone

    Embedded

    > Car with build-in telematics unit

    Connected vehicle forecast [selected markets; % of vehicles sold]1) Connectivity types

    > Safety enhancement (E-Call)

    > Infotainment (entertainment, info, navigation services)

    > Advanced HMI (speech recognition)

    > Integration of virtual personal assistants

    > Over the air updates

    > New OEM service offerings

    > New business models

    > Autonomous driving

    Drivers of growth

    Connected vehicles

    1) Including embedded (SIM card on the car, ~50% of volume), tethered (SIM card on the smartphone, ~20% of volume) and smartphone-based (calculating power in the smartphone, ~30 % of volume) systems, excl. OBD dongle-based connectivity Share considers only North America, Europe, Japan/Korea and Greater China; 2) Calculation power/functionality

    Source: Auto2X, IHS, Lazard, Roland Berger

  • 26 Global Automotive Supplier Study 2018.pptx

    However, improved internal & external connectivity will make modern vehicles vulnerable to an increasing number of cyber threats

    !

    Action items for holistic security concept

    Internet based attacks

    > 4G/5G

    > E-Call

    Hardware attacks

    > OBD II port

    > Direct ECU attacks

    Sensor attacks

    > GPS sensor

    > Radar sensor

    > Other sensors

    Near-field wireless attacks

    > Bluetooth

    > WiFi

    > DSRC

    > Remote key

    Secure gateway (domain isolation, firewalls/filters, centralized intrusion detection)

    Secure interfaces (secure M2M authentication, secure key storage)

    Secure processing (secure boot, run-time integrity, OTA updates)

    Secure network (message authentication, CAN ID killer, distributed intrusion detection)

    Illustrative

    > Threat vectors span all connected vehicle components and systems

    > Suppliers must design E/E architectures to prevent component-level attacks and understand the design implications for integration into vehicle sub-systems

    > Organization structures and design processes must adapt accordingly

    > Evolving legal and regulatory requirements for data security & protection and product safety must be addressed as well

    Cybersecurity threat vectors

    Source: Company information, Interviews with market participants, Lazard, Roland Berger

    Digitization

  • 27 Global Automotive Supplier Study 2018.pptx

    Electrification in Japan and North America mainly achieved through HEV technology so far, whereas China more focused on BEV/PHEV

    HEV Toyota only HEV excl. Toyota BEV PHEV

    10 1,154

    57%

    (652)

    39%

    (455)

    4%

    (41)

    0%

    (6)

    370

    9%

    (32)

    65%

    (239)

    27%

    (98)

    416

    44%

    (185)

    8%

    (32)

    23%

    (95)

    25%

    (104)

    526

    43%

    (228)

    25%

    (132)

    17%

    (89)

    15%

    (76)

    USA Europe2) China3) Japan3)/South Korea RoW

    284

    464

    621

    1,104

    2,475

    Total

    Electrification

    Global light vehicles xEV1) sales volume by region, 2016 ['000 units]

    HEV Mild and full hybrid electric vehicles; BEV Battery electric vehicles; PHEV Plug-in hybrid electric vehicles; xEV Class of electrified vehicles from mild hybrids to battery electric; 1) Excludes fuel cell electric vehicles; 2) Including Russia and Turkey; 3) China/Japan sales data includes only domestically produced xEVs

    Source: MarkLines, Press Research, RB xEV forecast model, Roland Berger

  • 28 Global Automotive Supplier Study 2018.pptx

    Powertrain electrification adoption will be influenced by push and pull factors that have different levels of influence by region

    Economics/ Total cost of ownership

    Drivers for global powertrain electrification1)

    1) Besides shown factors, all regions will be influenced by the emergence of automated driving with convergence on mobility (especially electrified RoboCabs) and appeal to consumers through performance and image 2) Total cost of ownership 3) New energy vehicle 4) Full Hybrid / Mild Hybrid 5) CAFC - Corporate average fuel consumption

    Source: Lazard, Roland Berger

    Electrification

    United States Europe China

    > Future widespread adoption of xEVs to be driven primarily through a TCO2) advantage compared to ICE vehicles

    > Depends on the evolution of fuel and battery prices, taxes, incentives, etc.

    > Increasing offer of desirable electrified vehicles in premium segments

    > Tightening regulations will be the dominant factor in CARB 177 states

    > City level emissions regulations not yet a major contributing factor

    > Tightening CO2 fleet emissions targets

    > ICE registration bans (e.g., Norway, Netherlands)

    > Environmental city access restrictions permitting only low- or zero-emission vehicles (e.g., London, Paris)

    > TCO2) advantage only becomes a dominant factor from 2030 onward

    > Incentives and tax advantages are present but declining

    > xEV adoption will largely follow China's announced targets for NEV3) and FH/MH4)

    > Environmental concerns drive city-level plate limitations for ICE

    > TCO2) advantage only becomes a dominant factor from 2030 onward

    > Subsidies to promote market development are present but declining

    Main driver

    Regulation Regulation

    Scenario variable(s)

    > CO2/km target in 2025

    > Phase-in percentage

    > Oil price

    > Battery cost

    > CAFC5) and NEV3) balances

    > FH/MH4) target

  • 29 Global Automotive Supplier Study 2018.pptx

    97%90%

    80%

    11%

    6%0% 7%

    2025

    16.8

    3%

    2020

    17.2

    2%

    2%

    2016

    17.6

    2%

    Lower battery costs and potentially rising oil prices may drive electrification penetration in the United States to ~ 20% by 2025

    High xEV scenario Oil: 65 USD/barrel | Battery cost: low

    Low xEV Scenario Oil: 45 USD/barrel | Battery cost: high

    Mid xEV scenario Oil: 55 USD/barrel | Battery cost: medium

    97% 93%88%

    7%

    2025

    16.8

    2%

    3%

    2020

    17.2

    2% 3%

    2%

    2016

    17.6

    2% 0%

    97% 95% 92%

    2%

    2025

    16.8

    3% 3%

    2%

    2020

    17.2

    2% 1%

    2016

    17.6

    2% 0%

    ICE & MH FH PHEV BEV

    20% 8% 12%

    USA New sales1) propulsion share [2016-2025; m units; % of sales]

    BEV Battery electric vehicles; PHEV Plug-in hybrid electric vehicles; FH Full hybrid vehicles; ICE & MH Internal combustion engine & mild hybrid vehicles; xEV Class of electrified vehicles from mild hybrids to battery electric 1) Passenger cars and light duty trucks

    Source: US EPA, IHS, RB xEV forecast model, Roland Berger

    Electrification

  • 30 Global Automotive Supplier Study 2018.pptx

    Electrification in Europe varies depending on CO2 emission targets Share could reach between 20% a. 32% for 2025

    High xEV scenario 75 g CO2 /km in 2025 (100% target)

    Low xEV Scenario 75 g CO2 /km in 2025 (90 % phase in)

    3) Mid xEV scenario 75 g CO2 /km in 2025 (95 % phase in)

    3)

    51%

    30%

    18%

    4%

    6%

    44%

    47%

    33%

    9%

    12%

    5%

    6%1%

    18%

    20253)

    17.3

    2% 2%

    2020

    16.8

    2% 2%

    4%

    2016

    16.2

    2% 2%

    51%

    30%20%

    4%

    7%

    44%

    47%

    35%

    10%

    9%5%

    6%1%

    15%

    20253)

    17.3

    2% 2%

    2%

    2020

    16.8

    2% 2%

    4%

    2016

    16.2

    2%

    51%

    30%21%

    4%

    7%

    44%

    47%

    39%

    11%

    7%5%

    6%1%

    11%

    20253)

    17.3

    2020

    16.8

    2% 2%

    2% 2% 4%

    2016

    16.2

    2% 2%

    PHEV BEV Diesel MH Diesel Gasoline MH Gasoline CNG/LPG FH

    32%

    20% 26%

    EU281) New sales2) propulsion share [2016-2025; m units; % of sales]

    BEV Battery electric vehicles; PHEV Plug-in hybrid electric vehicles; FH Full hybrid vehicles; CNG/LPG Compressed natural gas/liquefied petroleum gas vehicles; MD Mild hybrid vehicles; xEV Class of electrified vehicles from mild hybrids to battery electric 1) Incl. UK; 2) Passenger cars and light commercial vehicles; 3) The top 95/90% of the fleet need to meet the target; 95 % 80 g CO2/km; 90 % 85 g CO2/km Source: EEA, IHS, RB xEV forecast model, Roland Berger

    Electrification

  • 31 Global Automotive Supplier Study 2018.pptx

    China NEV market with significant growth forecasted; neutral NEV and CAFC balance with a 13% BEV and 4% PHEV share in 2025

    High xEV scenario Shares 25 % higher compared to mid xEV scenario

    Low xEV Scenario Shares 25 % lower compared to mid xEV scenario

    Mid xEV scenario Neutral CAFC and NEV balances; FH/MH target met1)

    98%

    85%

    62%

    8%

    20%

    0%13%

    4%

    4%

    2025

    0% 3%

    30.3 34.5

    2020

    1%

    2016

    26.8

    47%

    29% 38%

    98%

    82%

    53%

    10%

    25%

    17%0%

    6%

    5%0%

    34.5 30.3

    2016

    1% 26.8

    2020

    3%

    2025

    98%89%

    71%

    15%

    6%0% 11%

    1% 2%

    2020 2025

    3%

    30.3

    2016

    26.8

    3%

    34.5

    0%

    ICE BEV FH/MH PHEV

    China New sales propulsion share [2016-2025; m units; % of sales]

    BEV Battery electric vehicles; PHEV Plug-in hybrid electric vehicles; FH/MH Full and mild hybrid electric vehicles; ICE Internal combustion engine vehicles; xEV Class of electrified vehicles from mild hybrids to battery electric; CAFC Corporate average fuel consumption; NEV New energy vehicle 1) Within FH/MH, a significantly higher share is expected for 48V mild-hybrids

    Source: MIIT, IHS, RB xEV forecast model, Roland Berger

    Electrification

  • 32 Global Automotive Supplier Study 2018.pptx

    Recent developments point towards an acceleration of the disruption caused by the four automotive megatrends

    The timeline for level 4/5 autonomous keeps accelerating as necessary economics, regulations and technology fall into place

    Momentum for electrification is building among OEMs due to increasing regulatory pressure and accelerating technology advancement

    In digitization, artificial intelligence offers almost limitless possibilities, while connectivity-enabled technologies reach mainstream application

    Source: Lazard, Roland Berger

    New mobility business models are poised to disrupt car ownership, personal mobility and goods logistics

  • 33 Global Automotive Supplier Study 2018.pptx

    The automotive "end game" appears inevitable, yet the transition period is marked by a high level of uncertainty

    Time Today

    Degree of change

    2020 2025 2030

    North America > High penetration of ride hailing in major metropolitan

    areas > Technology leadership in highly automated driving > Strong regulatory support

    China > Strong push and high maturity for electrification > High penetration of ride hailing in major

    metropolitan areas > Strong players pushing for

    autonomous driving > Fast regulatory

    decisions

    Europe > High population density in cities

    ideal for RoboCabs > Stringent emission regulation

    drives electrification > Slow regulatory processes

    Emerging markets > Less stringent emissions regulations delay the

    growth of electric vehicles > Growing adoption of ride hailing in major cities > Autonomous driving is limited by lacking

    infrastructure and driving behavior

    Scenario development (applicable to light vehicle)

    Source: Lazard, Roland Berger

    2030+

  • 34 Global Automotive Supplier Study 2018.pptx

    Automotive End game zone

    Automotive suppliers will need to prepare for five distinct changes that will emerge on the road to the "end game"

    Emergence of software as a key differentiating factor > Digital features determine value to the end-customer > Digitization offers new monetization options 3

    Vanishing growth > Stagnation in mature markets > Increased usage of shared mobility solutions

    1 Accelerated change of technologies in focus > Increasing proliferation of electrified powertrains > Strong industry push for ADAS and connectivity solutions 2

    OEMs encounter increasing investment needs and margin pressure > New technologies require substantial investments > OEMs challenged by new competitors

    4 Valuation levels of commoditized suppliers might come under pressure > Outperformance of OEM valuation multiples might come to an end > Outlook of commoditized supplier sub-sectors might be seen more critical

    by equity investors as well as creditors

    5

    Emerging changes impacting automotive suppliers

    Source: Lazard, Roland Berger

  • 35 Global Automotive Supplier Study 2018.pptx

    Contents

    This document shall be treated as confidential. It has been compiled for the exclusive, internal use by our client and is not complete without the underlying detail analyses and the oral presentation.

    It may not be passed on and/or may not be made available to third parties without prior written consent from and .

    Roland Berger/Lazard

    The status

    Record volumes and profits, but key markets are at a tipping point

    A The consequence

    Automotive suppliers need to transform their business models

    D

    Roland Berger and Lazard Automotive teams

    The Contacts

    E The challenge

    Suppliers' traditional business will be questioned on multiple levels

    C The future

    Upcoming automotive disruption will fundamentally change the industry

    B

  • 36 Global Automotive Supplier Study 2018.pptx

    The automotive disruption is creating specific challenges for automotive suppliers

    Vanishing growth will put current supplier business models at stake

    Technology shifts require suppliers to invest in new and old technologies in parallel

    Suppliers need to build up competencies fast

    Suppliers will face even higher cost pressure

    Impact on suppliers

    Commoditized suppliers will be under increasing pressure from their investor base to increase shareholder value

    Vanishing growth 1

    Accelerated change of technologies in focus 2

    Emergence of software as a key differentiating factor 3

    OEMs encounter increasing investment needs and margin pressure 4

    Valuation levels of commoditized suppliers might come under pressure 5

    Challenges for the global supplier base

    Source: Lazard, Roland Berger

  • Vanishing growth will put

    current supplier business

    models at stake

    1

  • 38 Global Automotive Supplier Study 2018.pptx

    2025 2020 2010 2030/2035 2015

    101.9 94.9

    74.4

    88.8

    Overall growth is expected to stagnate and volumes might even decline in the long term in a shared autonomous world

    1 Vanishing growth

    > Growth has recently being slowing down in mature markets

    > In the future, supplier revenue growth will be determined more by the product portfolio and content per vehicle than by underlying production volume growth

    > After 2025, a decline of overall production volumes might occur in a disruptive scenario

    Business as usual

    Disruptive scenario (RoboCabs)

    Recovery and sustained growth

    Growth slow down

    Growth stagnation

    Emergence of shared and autonomous

    mobility

    Short term Mid term Long term

    > Slowing growth in mature markets US Europe Japan Korea

    > Shifting content per vehicle

    > Suppliers growth perspective will depend on product portfolio

    > Less ownership and higher utilization of mobility services

    > Exponential adoption of RoboCabs possible

    Today

    CAGR 3.5%

    CAGR 2.4%

    CAGR ~1-2%

    Shared mobility ?

    Short to long term growth perspectives [LV production; m units]

    Source: IHS, Global RB Mobility Revenue and Profit Pool Model, Lazard, Roland Berger

  • 39 Global Automotive Supplier Study 2018.pptx

    1.3%

    The current supplier business model of compensating negative cost impacts with volume growth will no longer work

    EBIT forecast without growth

    Productivity improvement

    7.3%

    -2.6%

    Volume impact

    1.2%

    EBIT margin last year

    Slowing/no growth

    7.3%

    EBIT margin next year

    Cost inflation

    Average supplier

    EBIT 2017e

    3.5% growth at contribution

    margin of 35%

    1.2 %LTA adjustment,

    material (1%), labor (2.5%) & other (1%) cost

    inflation

    At 1% of total material cost

    At 2.5% of total labor

    cost

    At 1% of other cost

    At 5% of own value add

    Assumptions

    As volume growth

    stagnates, suppliers will not be able to sustain their profitability

    through traditional

    means

    Slowing growth impact

    Potential impact on typical supplier EBIT development [%]

    Source: Lazard, Roland Berger

    1 Vanishing growth

  • 40 Global Automotive Supplier Study 2018.pptx

    As a consequence, suppliers will need to look for different growth areas Consolidation pressure will increase

    Further

    consolidation

    pressure

    New growth

    areas needed

    Global production volume growth may decline in the long term

    > Suppliers need to ensure future growth by increasing their content per vehicle/expanding their product portfolio or by diversifying into other related or non-related areas

    Compensating cost increases with growth will no longer work

    > Suppliers traditionally used growth to compensate for cost inflation and price decreases (LTAs)

    > However, overall growth might stagnate and global production volumes might decline in the long term with adoption of disruptive technologies

    Business model

    review necessary

    Competitive pressure in growth areas will be high

    > Many suppliers put focus on technologies with growth potential, increasing competitive pressure in these segments

    > Not all suppliers have the capability or competence or financial leeway to develop growth areas

    Impact and consequences for suppliers

    Source: Lazard, Roland Berger

    1 Vanishing growth

  • Technology shifts

    require suppliers to

    invest in new and old

    technologies in parallel

    2

  • 42 Global Automotive Supplier Study 2018.pptx

    2 Technology shifts

    Almost all vehicle domains will see a shift in growth focus over the next years Disruption impact particularly high in powertrain

    Impact of technology shifts by domain

    Source: Lazard, Roland Berger

    Disruption impact on current business

    Supplier domain Low High

    Interior

    Exterior

    Chassis

    Powertrain

    Powertrain > E-motors and power electronics > Battery systems

    > Simple 1-2 step reduction gears

    Interior > New HMI / display technologies > Extended Infotainment solutions

    > Increased interior insulation (NVH)

    > Integration of electronics and surfaces

    Next generation vehicle concept

    Substantial new requirements for the supply base

    Chassis > Advanced driver assistance systems and autonomous features

    > Adaptive suspensions

    > Active steering and braking systems

    > Shifting material focus and growing importance of multi-material applications

    > Growth of non-structural composites

    Exterior

  • 43 Global Automotive Supplier Study 2018.pptx

    Electric powertrain components to experience high growth rates at the expense of many traditional ICE components

    Implications for suppliers

    > ICE hardware commoditization

    > Battery systems and electronics provide differentiation opportunities

    > Limited potential in e-motors in part due to lower complexity vs. ICE

    Background

    > Increasing cost of ICE/exhaust treatment

    > Mild and full hybrids aid in emissions improvement and enable ICEs with downgraded requirements

    > BEV penetration rates increase driven by regulation, incentives and consumer demand

    Technology trends Winners

    > Future powertrain architectures are electrified resulting in several fast growing domains:

    E-motors

    Inverters/power electronics

    Battery

    Battery cooling

    1-2 step reduction gears

    Charging components

    Technology trends Losers

    > Consequently, traditional ICE components and systems to experience below average growth rates:

    Engine, camshafts, crankshafts, valves, lubricants

    Exhaust, oil filters, alternators, ignition

    Transmission, clutch gearbox, propeller shaft

    Technology shifts Powertrain

    Source: Lazard, Roland Berger

    2 Technology shifts

  • 44 Global Automotive Supplier Study 2018.pptx

    The ADAS and AD component market will strongly grow providing an increasing revenue pool mainly for software focused suppliers

    Implications for suppliers

    > Hardware standardization / commoditization of traditional chassis components and systems

    > Intelligent systems integrated with ADAS are expected to offer growth potential within respective domains (e.g., steering, suspension, vision systems, passenger safety systems)

    Background

    > ADAS offers several benefits to society and industry, including accident mitigation, congestion reduction, increased driving comfort and fuel efficiency gains

    > Advanced vehicle control and sensor systems are the main benefactors of the shift to greater advanced driver assistance systems: Advanced driver assistance systems and

    autonomous features Adaptive suspensions Active steering + braking actuators E-Axles (as part of electrified powertrain) Vision sensors (LiDAR, cameras)

    Technology trends Winners

    Technology trends Losers

    > Meanwhile, traditional vehicle control systems are at risk for reduced market share: Hydraulic steering systems Traditional axles Conventional suspensions

    Technology shifts Chassis

    Source: Lazard, Roland Berger

    2 Technology shifts

  • 45 Global Automotive Supplier Study 2018.pptx

    Emissions regulations push OEMs for increased lightweighting of body structures while ADAS and connectivity create new use cases

    Implications for suppliers

    > Shifting materials competencies for non-structural components suppliers

    > New use cases for intelligent exterior systems may offer differentiation potential particularly when paired with ADAS solutions

    Background

    > Shifting material focus and growing importance of multi-material applications

    > New technology integration potential for enhanced safety

    > New design possibilities due to missing ICE powertrain

    > Advanced material components and advanced safety features offer potential in exterior components: Non-structural composites Increased usage of plastics Side and rear view cameras and screens Driving mode indication (autonomous vs. human

    driver) Lock systems using cell phones

    Technology trends Winners

    Technology trends Losers

    > Traditional materials and exterior components most at risk for lost share include: Cast parts Non-structural steel parts Traditional side and rear view mirrors

    Technology shifts Exterior

    Source: Lazard, Roland Berger

    2 Technology shifts

  • 46 Global Automotive Supplier Study 2018.pptx

    Autonomous driving will drastically change interior designs and provide innovation and growth potentials

    Background

    > Growing importance of non-driving-related activities, such as infotainment, completing tasks while driving automated, eating and drinking

    > Interior provides huge potential for innovation and continued growth

    Technology trends Winners

    > New possibilities to design the interior of a vehicle by electric powertrain, connectivity and automated driving New HMIs1) (Augmented reality head up displays,

    gesture recognition, haptic feedback) and integration of electronics and surfaces (OLED2) panels, curved screens)

    Extended infotainment solutions New design possibilities/requirements, e.g. luxury

    lounge seating or increased interior insulation (NVH3))

    Key success factors

    > Successful translation of customer needs in product innovation

    > Product differentiation > Integration of E/E to ensure

    value creation

    Technology trends Losers

    > Traditional interior components that might face lower demand Analog instrument clusters Buttons and switches Conventional valves, pumps and compressors

    Technology shifts Interior

    1) Human-machine interfaces; 2) Organic light emitting diode; 3) Noise, vibration and harshness

    Source: Lazard, Roland Berger

    2 Technology shifts

  • 47 Global Automotive Supplier Study 2018.pptx

    Suppliers will need to commit resources to emerging technologies and in parallel navigate investments into current business

    Investments in existing technology are still necessary

    > ICE advancement is indispensable for reaching emission targets > Emerging markets still require conventional technologies > Risk of losing market share too early and hence the ability to generate enough

    resources for impactful investments in new technology

    Expensive investments into new technologies

    > Limited availability of attractive targets with many potential suitors drives up the cost to pursue inorganic growth opportunities

    > Many new technologies require extensive additions to suppliers' existing capability set with limited specific talent and experience available for organic development

    > New entrants from the consumer electronics space are committing extensive resources into developing new solutions, which increases the investment required to develop competitive offerings

    Strategies for non-growth business areas are needed

    > Harvesting/"Last man standing" strategies potentially including consolidation plays

    High financial

    burden

    No immediate

    return on

    investment

    M&A with

    increased

    importance

    New competitive

    landscape

    Impact and consequences for suppliers

    Source: Lazard, Roland Berger

    2 Technology shifts

  • Suppliers need to build up

    competencies fast

    3

  • 49 Global Automotive Supplier Study 2018.pptx

    With a vastly different set of features compared to today's vehicles, future cars will depend increasingly on software

    3 Competency build up

    > Some of the hardware components will be replaced with more streamlined design and improved software functionality E.g. infotainment console

    > The convergence of consumer electronics and the automotive industry leads to increased number of lines and higher complexity of the software code

    > As vehicle software becomes the main differentiator, suppliers need to build up the necessary competencies to ensure future competitiveness

    18 m Boeing 787

    18 m Google Chrome

    45 m Microsoft Office 2013

    62 m Facebook (excludes back-end code)

    100-150 m Modern premium vehicle

    ~300 m Future vehicle (2030+)

    Software reliance of future vehicles [# of lines of software code]

    Source: Git repository, Company websites, IEEE, Press research, Lazard, Roland Berger

  • 50 Global Automotive Supplier Study 2018.pptx

    IVI hardware integrator

    IVI software integrator

    Software companies are aiming at taking over ownership of the OEM interface by acting as system integrators

    Before Potential > In the past, IVI hardware providers largely played the system integrator role, buying IVI software from external parties and interacting directly with OEMs

    > With the rise of importance of software, hardware suppliers are in danger of losing their system integrator status

    > Today, IVI software players have capabilities to act as system integrators, managing OEM client interface and simply sourcing hardware from other companies

    > As a consequence, traditional suppliers have taken steps to invest in software and build integration capabilities to replace external software providers

    OEM customer OEM customer

    Hardware player as the system integrator

    Supplier 2

    Supplier n

    IVI software integrator

    Supplier 2

    Supplier n

    Software player as the system integrator

    Supplier 2

    Supplier n

    IVI hardware provider

    Case study of software players as IVI1) integrators

    1) In-vehicle infotainment

    Source: Industry interviews, Lazard, Roland Berger

    3 Competency build up

  • 51 Global Automotive Supplier Study 2018.pptx

    The new competencies are difficult to acquire and suppliers have to compete for talent with high tech giants and Silicon Valley start ups

    Cultural mindset

    change required

    Old

    competencies

    will often not

    work anymore

    Software has become a main differentiation factor

    > Software related functions have become main differentiation criteria for car buyers > Ascending technologies around ADAS heavily rely on software > Software functionality increasingly substitutes hardware solutions

    Hiring of talent already very difficult for suppliers

    > IT and consumer electronics giants as well as start ups compete for similar (software) engineering talent

    > OEMs are currently building up their capabilities around new technologies, increasing the fight for talent

    New competencies

    hard to build up

    > IT and consumer electronics industries with different innovation approach and product development processes

    New culture necessary to successfully integrate new competencies

    Impact and consequences for suppliers

    Source: Lazard, Roland Berger

    3 Competency build up

  • Suppliers will face even

    higher cost pressure

    4

  • 53 Global Automotive Supplier Study 2018.pptx

    OEMs will search for ways to cope with competitive pressure and upcoming investment needs, many of them affecting suppliers

    4 Cost pressure

    OEM cost reduction levers (Selection)

    > Disaggregation: OEMs move towards selective sourcing on component level

    Implications for suppliers

    > Increased transparency

    > Margin for system integration under risk

    Relevance Impact

    -

    +/- > Outsourcing: OEMs may outsource captive production of non-differentiating hardware parts

    > Potential for additional business

    > Additional business might be declining in the long term

    - > Procurement: OEMs will continue to expect price downs/LTAs

    > Strong OEM position, as many hardware parts will commoditize even more

    > Joint development: OEMs will reduce development efforts for certain technologies like Diesel

    > R&D budgets at suppliers affected -

    > Structural setup: OEMs will optimize their footprint and overhead structure

    > No direct implications

    > Complexity reduction: OEMs may reduce their model ranges and variants

    > Part standardization and volume bundling as consequence -

    Cla

    ssic

    leve

    rs

    New

    leve

    rs

    - + Negative Positive High relevance Low relevance

    n/a

    Cost and investment reduction efforts from OEMs

    Source: Lazard, Roland Berger

  • 54 Global Automotive Supplier Study 2018.pptx

    Some OEMs move towards more selective sourcing on component level in order to benefit from hardware commoditization

    Hardware commoditization

    > Limited differentiation

    > Low cost of components

    Disaggregation of systems

    > OEMs moving from sourcing full systems to individual components

    > Some European OEMs lead push for disaggregation, others expected to follow

    Rise of software content

    > New features are SW driven

    > Opportunity to differentiate

    OEM control of design

    > Fit product design language

    > Reduce cost, raise quality

    Integration of systems

    > Enables E/E architecture integration across vehicle systems

    > Modularization of software supports possible convergence of different systems (e.g., IVI and ADAS)

    > Possibly move towards software-as-a-service

    > Interchangeability of suppliers increases

    > OEMs may integrate or outsource the activity to Tier 1 suppliers

    Increase cost transparency | Build up competency | Enable platform development Direct access to expert tier 2 suppliers | Reduce time to market

    OEM benefit to disaggregate

    Example: Disaggregation of systems

    Source: Lazard, Roland Berger

    4 Cost pressure

  • 55 Global Automotive Supplier Study 2018.pptx

    The changing competitive environment and shifting differentiation criteria will challenge suppliers and increase cost pressure

    Further growing

    pressure on

    component prices

    Competitive

    pressure from

    disaggregation &

    standardization

    OEM face competitive pressure and high investment needs

    > OEMs will look for options to reduce their cost base and redirect investments into new technologies

    > New cost levers like standardization or disaggregation will increase pressure on suppliers

    > OEMs may decide to develop/produce future growth areas in-house (to protect their workforce)

    Lower room for

    differentiation

    Difficult access to

    data driven

    business models

    New competitors are emerging and aiming at new growth pockets

    > Consumer electronics giants have set their sight on the automotive industry > Start ups from Silicon Valley and Israel are moving fast in technology development

    End consumer differentiation criteria are changing

    > End customers value connectivity and other digital features > Fleet customers aiming at Mobility as a Service have different requirements than

    private customers

    Impact and consequences for suppliers

    Source: Lazard, Roland Berger

    4 Cost pressure

  • Valuation levels of

    commoditized suppliers

    might come under pressure

    5

  • 57 Global Automotive Supplier Study 2018.pptx

    Over the past five years, the gap between the valuation of automotive OEMs and suppliers has widened in favor of suppliers

    Source: Factset, Lazard, Roland Berger

    P/E NTM1)

    1x

    3x

    5x

    7x

    9x

    11x

    13x

    15x

    17x

    19x

    21x

    23x

    25x

    27x

    29x

    Nov

    -07

    Nov

    -08

    Nov

    -09

    Nov

    -10

    Nov

    -11

    Nov

    -12

    Nov

    -13

    Nov

    -14

    Nov

    -15

    Oct

    -16

    Nov

    -17

    > Supplier valuation multiples have clearly outperformed OEMs over the past years

    > The valuation spread is currently at an all-time high suppliers nearly trade at 2x the valuation of OEMs

    > OEM valuations appear to have factored in risks from disruptive trends in contrast to supplier valuations

    Selected automotive OEMs3) Selected automotive suppliers4)

    Impacted by the economic crisis

    10-y- = 11.2x2)

    8.0x

    10-y- = 9.0x2)

    13.3x

    5 Valuation levels

    Evolution of automotive OEM and supplier valuations

    1) NTM = Next twelve months; 2) Excluding the distorting impact of the economic crisis (Jan-Dec 2009 multiples); 3) BMW, Daimler, Ford, General Motors, Honda, Toyota and Volkswagen; 4) American Axle, Autoliv, BorgWarner, Brembo, Continental, Dana, Delphi, Faurecia, Hella, Johnson Controls, Magna, Norma and Valeo

  • 58 Global Automotive Supplier Study 2018.pptx

    Today's valuation multiples of suppliers are on average nearly twice the level of OEMs However, this trend may reverse mid-term

    Equity investors do not give traditional OEMs credit for their "Terminal Value"

    > Risk of market share loss to (potential) new competitors (e.g. Tesla, Chinese EV OEMs, Uber, et al.)

    > Risk to lose profit pool share to new entrants from technology/software space > Risk of too large workforce that is no longer fully utilized (e.g. component manufacturing)

    However, trend may reverse for commoditized suppliers in the medium-term due to several risks

    > Increasing insourcing from OEMs to protect in-house work force/alleviate impact from required restructuring in traditional technologies

    > Increasing price pressure > Further share gain of new market entrants from the tech/electronics industry > Worsening financing terms/interest rates

    Suppliers on average unaffected so far some even benefitting from disruptions

    > Changing OEM structure does not negatively affect suppliers > New technologies required offer additional business potentials

    Increasing pressure from investor base to

    maintain high valuation

    Increasing risk of activists joining investor base

    Need to re-think value-maximizing portfolio

    actions

    Potentially worsened re-financing conditions

    mid-term

    Impact and consequences for suppliers

    Source: Lazard, Roland Berger

    5 Valuation levels

  • 59 Global Automotive Supplier Study 2018.pptx

    Contents

    This document shall be treated as confidential. It has been compiled for the exclusive, internal use by our client and is not complete without the underlying detail analyses and the oral presentation.

    It may not be passed on and/or may not be made available to third parties without prior written consent from and .

    Roland Berger/Lazard

    The status

    Record volumes and profits, but key markets are at a tipping point

    A The consequence

    Automotive suppliers need to transform their business models

    D

    Roland Berger and Lazard Automotive teams

    The Contacts

    E The challenge

    Suppliers' traditional business will be questioned on multiple levels

    C The future

    Upcoming automotive disruption will fundamentally change the industry

    B

  • 60 Global Automotive Supplier Study 2018.pptx

    Automotive suppliers can consider 8 key elements in order to transform their business model

    1 Strategy and portfolio

    2 Product and technology

    8 Cultural mindset

    Operating cost base

    Capital/ Financing

    Competencies & capabilities

    Organization & governance

    Partnerships

    3 4 5 6 7

    Enablers

    Automotive supplier transformation toolbox

    Source: Lazard, Roland Berger

  • 61 Global Automotive Supplier Study 2018.pptx

    Suppliers need to define their end-game strategy and rethink their product portfolio in order to capture future growth opportunities

    Strategy & Portfolio 1

    Key questions for suppliers

    > What is the impact of the disruptive trends Mobility, Autonomous driving, Digitization and Electrification on the current business?

    > With the emergence of new technologies, will the current product portfolio still be balanced and provide sustainable growth in the long term?

    > As growth prospects are going to differ by segment and even by component, which products will continue to grow and which will decline?

    > Which new segments can provide growth opportunities that fit well with the essence of the current business, and are resilient to expected shifts in the competitive environment?

    > Can a ramp-down strategy for a decreasing segment be financially viable?

    Key takeaways

    > Clear understanding of the impact of disruptive trends on the current business

    > Product portfolio decisions have become key strategic topics

    > Applicable generic strategies include Diversification into

    growth Divestment Harvesting in shrinking

    areas ("Last man standing")

    Key questions and key takeaways for suppliers

    Source: Lazard, Roland Berger

  • 62 Global Automotive Supplier Study 2018.pptx

    Active consolidation and harvesting are often financially viable strategies Future sources for growth have to be identified

    1. Strategic responses to declining segments 2. New sources for growth

    Consolidate Maintain

    leadership

    Harvest

    Ramp-down business model

    Exit/Divest

    Competitive Intensity

    Low High

    Co

    mp

    etit

    ive

    Po

    siti

    on

    Wea

    k S

    tro

    ng

    > Before the industry disruption reaches a tipping point, suppliers should consider end-game strategies for their declining business areas

    > Suppliers can expand into new offerings and end markets to provide outlets for growth

    > Diversification into other industries leveraging current core competencies as an alternative

    Core

    Adjacent

    Step-out

    Incremental

    innovation

    New go-

    to-market

    Diversify into other

    industries

    New value-

    chain position

    New applications

    Adjoining

    value-chain

    position

    New technology

    segment

    New geographies

    Strategic decision matrix and portfolio growth options

    Source: Lazard, Roland Berger

    Strategy & Portfolio 1

  • 63 Global Automotive Supplier Study 2018.pptx

    2012

    Bohong / Wescast Industries

    Continental/Freudenberg molded brake parts

    Tupy / Cifunsa

    Wuhan Iron & Steel/ThyssenKrupp TB

    Bosch/ SPX

    Metalsa / ISE Automotive

    Hebei Lingyun / Kiekert

    Delphi / FCI MVL

    Magna/ Ixetic

    Faurecia/ ACH Interiors

    Grupo Antolin/ CML

    Lear/ Guilford Mills

    Nemak / JL French Automotive

    Continental/ Parker Hannifin MCS

    Also in 2017 many suppliers have streamlined their portfolio or invested into further growth through M&A

    2013

    Amtek / Neumayer Tekfor

    Wanxiang Group/ A123

    Ningbo Huaxiang / HIB Trim Parts

    Huayu Auto. Systems / Yanfeng Visteon JV

    BorgWarner/ Wahler

    Mahle/ Behr

    Gentherm/ W.E.T. Automotive

    Tokai Rubber/ Anvis

    Grammer/ Nectec

    Gentex/ JCI HomeLink

    TMT / ZF Boge

    Halla/ Visteon climate business

    Wangfeng/ Meridian Lightweight

    Nidec/ Honda Elesys

    2014

    Amtek/ Kuepper Group

    AVIC/ Hilite

    AVIC/ KOKI Technik

    AUNDE/ Fehrer

    Amtek/ Kaiser

    Bosch / ZF Lenksysteme

    Shanghai Prime Machinery/Nedschroef

    MAHLE/ Letrika

    ZF/ TRW

    Lear/ Eagle Ottawa

    Visteon/ JCI auto. electronics bus.

    Sensata/ Schrader

    Delphi/ Unwired Technology

    Federal-Mogul/ TRW valves business

    2015

    AVIC Automotive/ Henniges

    China National Tire/ Pirelli

    Delphi/ HellermannTyton

    Continental/ Elektrobit

    BorgWarner/ Remy International

    Grupo Antolin/ Magna interior business

    Mann+Hummel / Affinia

    Magna/ Getrag

    Linamar/ Montupet

    Johnson Electric / Stackpole

    MAHLE/ Delphi thermal business

    NGK Spark Plug/ Wells Vehicle Electronics

    Valeo/ Peiker Acustic

    Harman/ Symphony Teleca/Redbend

    2016

    Illinois Tool Works/ TRW Auto. Elec. & Comp.

    Musashi Seimitsu/ Hay

    Freudenberg/ TBVC

    Yinyi Group/ Punch Powertrain

    Plastic Omnium/ Faurecia exterior bus.

    Ningbo Joyson/ KSS

    Megatech/ Boshoku Europe

    Valeo/ FTE Automotive

    Samsung/ Harman

    Valeo/ Ichikoh

    VBP Group/ Mobile Climate Ctrl. Group

    American Axle/ Metaldyne

    Mecaplast/ Key Plastics

    CIE Automotive / Grupo Amaya Telleria

    Intel/ Mobileye

    Superior Industries/ Uniwheels

    Lear/Grupo Antolin (Seating & Metal Business)

    BorgWarner/ Sevcon

    ZMJ/CRCI / Bosch SMG

    Luxshare / ZF Body Controls

    Fountain West/Bosch Mahle Turbo Chargers

    2017

    KSS/ Takata

    TE Connectivity/ Hirschmann Car Comm.

    Fuxin Dare Automotive/ Carcoustics

    Motherson Sumi Systems /PKC Group

    Genuine Parts/ Alliance Automotive

    CIE Automotive/ Newcor

    WABCO/ RH Sheppard

    Selected automotive supplier acquisitions, 2012-2017 (YTD)

    Key: Acquirer/Target Note: Excluding financial sponsor led transactions. Some 2017 transactions are signed, but not yet closed

    Source: Capital IQ, Thomson, Dealogic, Merger Market, press research, Lazard, Roland Berger

    Strategy & Portfolio 1

  • 64 Global Automotive Supplier Study 2018.pptx

    In addition, there is a trend towards spinning-off or separating businesses to reduce complexity and increase focus

    Announcement date: 10-Oct-2017

    "Honeywell Plans to Spin Homes and the ADI Global Distribution Business, a ~USD 4.5B Business, and Transportation Systems1), a ~USD 3.0B Business, into Two Independent, Publicly-Traded Companies by End of 2018 [] Prospective Honeywell Portfolio Consists of High-Growth Businesses with Strong Operational and Technology Synergies, Focused on Six Key End Markets [] Independent Investment Decisions Will Position Spins to Thrive in Evolving End Markets."

    Honeywell press release (10-Oct-2017)

    Announcement date: 14-Sep-2017

    "Autoliv initiates strategic review of separating its business segments, Passive Safety and Electronics [] the intent is to create two publicly traded companies capable of addressing two distinct, growing markets with leading product offerings [] the strategic review process will evaluate this and other options [] if the separation takes place, the process is estimated to take around one year under most separation scenarios."

    Autoliv press release (14-Sep-2017)

    Announcement date: 03-May-2017

    "Delphi Automotive PLC today announced its intention to execute a tax-free spin-off of its Powertrain Systems segment into a new, independent publicly traded company ("Powertrain") [] the transaction, which is expected to be completed by March 2018 [] represents an exciting opportunity for our businesses by creating two independent companies, each with a distinct product focus, a proven business model, and the flexibility to pursue accelerated investments in advanced technologies."

    Delphi Automotive press release (03-May-2017)

    Announcement date: 24-Jul-2015

    "Johnson Controls announced today that it plans to pursue a tax-free spin-off of its Automotive Experience business. Following the separation, which is expected to close in approximately 12 months, the Automotive Experience business will operate as an independent, publicly traded company."

    Johnson Controls press releases (24-Jul-2015)

    "As two distinct publicly traded companies, Johnson Controls and Adient will be better positioned to capitalize on significant growth opportunities and focus resources on their respective businesses and strategic priorities."

    Johnson Controls press releases (03-Oct-2016)

    Corporate spinoffs Selected examples

    1) Refers to turbocharger business

    Source: Press, Company information, Lazard, Roland Berger

    Strategy & Portfolio 1

  • 65 Global Automotive Supplier Study 2018.pptx

    Once the target product portfolio is selected, suppliers must reassess their long-term product and technology roadmaps

    Product & Technology 2

    Key questions for suppliers

    > How do the product and technology roadmaps need to change to ensure differentiating innovations for selected growth areas, especially given that traditional hardware is increasingly becoming commoditized?

    > Does the roadmap include new electronics and software driven features as key differentiators?

    > Which new product and service offerings or business models that are enabled by new technologies and features should be included?

    > How might the product portfolio decision change the company's value chain role?

    > Should the company deliberately seek to cover different parts of the value chain to extract critical differentiation value?

    Key questions and key takeaways for suppliers

    Source: Lazard, Roland Berger

    Key takeaways

    > Articulation of differentiating vs. non-differentiating product factors is of critical importance

    > Electronics and software are key differentiators in future growth areas

    > Value chain shifts may involve competitors becoming customers or development partners

  • 66 Global Automotive Supplier Study 2018.pptx

    The disruption offers a unique opportunity for traditional suppliers to expand from selling hardware only to selling features and services

    Expansion options from traditional business models

    Product Service

    SW-enabled/ active components

    Passive components

    EPS controls SW

    Sof

    twar

    e

    Table-stakes

    Emerging SW features

    Wheel

    Rack/Pinion

    Precision steering

    On-demand driving "experience" downloads

    Driving profiles stored in the cloud

    Electro-mechanical steering system

    (designed for ADAS integration)

    Cybersecurity

    Future BEV autonomous system

    Power pack

    Column H

    ardw

    are

    Example: Steering Systems

    Traditional mechanical system

    OTA updates

    Shift from hardware-only to software-enabled & service offering

    Source: Lazard, Roland Berger

    Product & Technology 2

  • 67 Global Automotive Supplier Study 2018.pptx

    A lower operating cost base is necessary to cope with increasing competitive pressure, especially for decreasing segments

    Operating cost base 3

    Key questions for suppliers

    > To what extent will pricing be impacted by increasing competitive pressure from OEMs and new competitors?

    > Will today's structural cost (overhead, footprint, etc.) still be required in the future?

    > Is the current product design or manufacturing setup appropriate given the decreasing differentiation on hardware parts?

    > In the future, which activities will be core and which will be non-core?

    > What new possibilities are available to lower operating costs (e.g., Industry 4.0)?

    Key questions and key takeaways for suppliers

    Source: Lazard, Roland Berger

    Key takeaways

    > Cost efficiency as the only remaining differentiator in commoditized segments

    > Complexity reduction is a main lever to unlock new cost saving potentials

    > Strong cash flow generation will be important to finance future strategic moves

  • 68 Global Automotive Supplier Study 2018.pptx

    Suppliers need to maximize cash generation from operations and rethink their investments into R&D and assets

    Capacity rightsizing

    Target cost budget

    Purchasing excellence

    Lean overhead

    Operational efficiency

    Current cost

    runrate

    R&D efficiency

    Maximize resource generation (efficiency) Strategically allocate resources (effectiveness)

    Reduce cost and improve output adapting to lower volumes and higher competitive pressure

    Generate additional cash by strategically focusing spending on the right products, investments and R&D activities

    Target cash flow

    Focus R&D on key segments

    Rethink investments

    Active portfolio management

    Cash flow budget 2018

    Reduce operational cost base Strategically rethink cash allocation

    Supplier performance improvement Main levers and budget impact

    Source: Lazard, Roland Berger

    Operating cost base 3

  • 69 Global Automotive Supplier Study 2018.pptx

    Additional financing needs for new growth areas and diverging business strategies demand a review of the current financing plan

    Financing/Capital 4

    Key questions for suppliers

    > What is the best option to finance the pursuit of new growth areas?

    > Does the financing plan consider any M&A transactions that are planned in order to build up new competencies and/or capabilities?

    > Does the current financing structure provide enough leeway to allow investments into both existing technology and new technology at the same time?

    > Are current lenders willing to provide financing for new growth areas?

    > Are current lenders willing to finance ramp-down business segments?

    Key questions and key takeaways for suppliers

    Source: Lazard, Roland Berger

    Key takeaways

    > A clear view on future financing needs is important

    > Different end game strategies may exhibit unique financing requirements and distinct risk/return profiles

    > Alignment of lender interests with business strategy is necessary

    > New/additional pools of financing should be considered

  • 70 Global Automotive Supplier Study 2018.pptx Source: Bloomberg, CapitalIQ, Dealogic, company information, Lazard, Roland Berger

    Suppliers increasingly consider IPOs to get access to new capital pools

    IPO Date Company Business Description Country

    Market

    Capitalization

    [EUR bn]1)

    Primary

    Tranche2) Secondary

    Tranche3)

    25-Oct-2017 TI Fluid Systems Fluid systems manufacturer ~1.5

    13-Oct-2017 Voltabox Battery systems manufacturer ~0.4

    04-Oct-2017 Pirelli Tire manufacturer ~6.8

    20-Jul-2017 Jost Truck components manufacturer ~0.7

    07-Apr-2017 Gestamp Body and structural parts manufacturer ~3.2

    1.2 1.4 0.7 0.3

    1.2

    2.6 1.6

    5.2

    Development of global automotive supplier IPO volume [EUR bn]4)

    12 7 6 4 2 2 6 7

    Number of IPOs

    2010 2011 2012 2013 2014 2015 2016 2017 YTD5)

    Selected European automotive supplier IPOs in 2017

    1) As of 19-Nov-2017; 2) Primary tranche refers to the sale of newly issued shares during an IPO (i.e. in order to raise capital); 3) Secondary tranche refers to the sale of existing shares during an IPO; 4) Including transactions with an IPO volume of >EUR 100 m; 5) As of 24-Nov-2017

    Financing/Capital 4

  • 71 Global Automotive Supplier Study 2018.pptx

    Success in new growth areas will require a new set of competencies and capabilities

    Competencies & capabilities 5

    Key questions for suppliers

    > What competencies and capabilities will be needed in new technology growth areas that are driven by sensors, electronics and software?

    > What are the current core competencies and capabilities of the organization?

    > Which aspects of company fundamental knowledge or physical capabilities can be leveraged or bundled throughout the organization to develop future products and technologies?

    > What are the remaining competency and capability gaps?

    > What is the best set of options available to close these gaps: Building up competencies in-house, establishing one or more partnerships, and/or acquiring a company with the necessary competencies and capabilities?

    > What is a feasible timeline to build up the required competencies and capabilities and how will this impact the company's product and technology roadmaps?

    Key questions and key takeaways for suppliers

    Source: Lazard, Roland Berger

    Key takeaways

    > New technology growth areas are driven by sensors, electronics and software

    > Understanding the gaps between current and needed competencies and capabilities is vital

    > Evaluation of internal vs. external options to close competency gaps should be on the corporate agenda

    > External options like M&A and partnerships may provide time and cost advantages

  • 72 Global Automotive Supplier Study 2018.pptx

    As an example, future leadership in vehicle dynamics requires closing gaps on new electronics and software capabilities

    Conventional body controls Advanced body controls

    > Leading vehicle dynamics systems and component suppliers of the future will be those who develop expertise in both conventional and emerging technologies

    > Gaining the competencies required may take on different forms, including:

    Investment to develop applicable skills already available in-house

    M&A

    Partnerships and alliances

    Illustrative

    Fundamental knowledge

    Motion control Motion control

    Electro-mechanical actuation

    Physical capabilities

    System design System design

    Mechatronics implementation

    Manufacturing efficiency Manufacturing efficiency

    NVH management NVH management

    Software modelling

    ECU integration & sensor fusion

    Fluid management Fluid management

    ADAS systems design

    Sensors

    Cybersecurity

    Conventional vs. advanced vehicle dynamics skills and capabilities required

    Source: Lazard, Roland Berger

    New knowledge and capabilities required to build advanced vehicle body controls

    Competencies & capabilities 5

  • 73 Global Automotive Supplier Study 2018.pptx

    Organizational structure needs to accommodate the requirements of new business models

    Organization & governance 6

    Key questions for suppliers

    > Where should the organization allocate new technology development to have the strongest impact?

    > What is a reasonable size for the new technology organization, considering new competencies and capabilities are required?

    > Is a new business unit or even company necessary to separate the old from the new, as startups and new competitors act faster than the traditional supply base?

    > Could an in-house "Think-tank" or start-up fund be viable alternatives to a new organizational unit?

    > How does governance need to change in order to oversee new technology developments?

    > Are traditional KPIs still valid in order to provide the necessary freedom and achieve the right results under the new circumstances?

    Key questions and key takeaways for suppliers

    Source: Lazard, Roland Berger

    Key takeaways

    > Organizational structure is a key enabler for competency and capability build up

    > New competitors and startups are shifting competitive dynamics and will challenge traditional organization structures and governance

    > An in-house "Think tank" or an internal startup fund can be viable options

  • 74 Global Automotive Supplier Study 2018.pptx

    Many suppliers will have to manage two fundamentally different business models under one roof Organizational structure is key

    > High levels of product standardization to minimize the required investment levels for product development

    > Target high levels of centralization of certain functions to reduce OPEX

    > Create a culture focused on streamlined processes built around commoditized product

    > Choose a governance model to optimize cash generation

    > Export transferrable competencies to the New BU and legacy BUs that will be pillars for new growth

    > High visibility to senior leadership/CEO to ensure fast decision making and necessary support

    > Bundling of necessary internal competencies in one place in the organization

    > Facilitate add-on of additional external competencies

    > Implement an innovation culture with agile principles

    > Right growth focused governance model with new business metrics and objectives

    > Shield the business from the "old way" of operating

    New technologies/"Start-up" Old technologies/"Harvest"

    Emergence of differing organizational requirements

    Source: Lazard, Roland Berger

    Organization & governance 6

  • 75 Global Automotive Supplier Study 2018.pptx

    Traditional suppliers will have to be more open to partnerships to effectively close competency gaps and enable innovation

    Partnerships 7

    Key questions for suppliers

    > Which competencies or capabilities can be best provided by a partner in order to develop a new product or technology?

    > Which products and technologies are only technically and commercially feasible when jointly developed?

    > How can innovation and product development be accelerated by teaming up with others and forming an innovation ecosystem?

    > Who can be a suitable partner, considering that sought after competencies often lie outside the traditional automotive industry?

    > Is the organization ready to work with external partners on innovation?

    > What is a suitable governance model for a partnership?

    Key questions and key takeaways for suppliers

    Source: Lazard, Roland Berger

    Key takeaways

    > The complexity of new systems require a variety of capabilities rarely controlled by a single player

    > Shortened innovation cycles and the possibility to share investment costs make partnerships increasingly attractive alternatives to traditional in-house R&D

    > Time is critical, as many partnerships have formed already

  • 76 Global Automotive Supplier Study 2018.pptx

    Many traditional suppliers have already formed partnerships to jointly develop new technologies

    Companies Strategic rationale Areas

    Interior thermal mgmt. Collaboration on thermal management technologies for the cockpit of the future Mahle/Faurecia

    Powertrain eAxle Joint development of a powertrain based on truck eAxle technology Bosch/ Nikola Motor Company

    ADAS motion controls Develop advanced motion control, esp. braking and steering system integration Continental/Nexteer

    ADAS AI technology Collaboration on autonomous truck platform and artificial intelligence Paccar/Nvidia

    ADAS safety & interiors Partnership to develop disruptive and differentiating interior and safety systems ZF/Faurecia

    ADAS AI technology Collaboration to deliver self-driving technology with the NCAP safety certification ZF/Hella/Nvidia

    Full autonomous car Joint development to create an autonomous driving platform Delphi/Intel1)/BMW

    Example of recent supplier partnerships

    1) Including MobilEye, acquired by Intel

    Source: Press research, company information, Lazard, Roland Berger

    Partnerships 7

  • 77 Global Automotive Supplier Study 2018.pptx

    A new cultural mindset enables the business model transformation

    Cultural mindset 8

    Key questions for suppliers

    > Is the organization operating at the right level of risk and with enough focus on innovation to compete with new and often more nimble non-traditional competitors?

    > Do teams have the necessary freedom and agility to pursue new technology topics, given that future automotive product development cycles will be much shorter than today?

    > Is the current company culture attractive for new talent in future business areas?

    > Has the company already transformed from functional silos towards cross-functional collaboration?

    > Is company leadership at the forefront of a new cultural mindset?

    Key questions and key takeaways for suppliers

    Source: Lazard, Roland Berger

    Key takeaways

    > Software and consumer electronics players have a different cultural mindset as compared to traditional automotive suppliers

    > Providing the right company culture is important to attract talent in emerging technology areas

    > Cultural mindset forms a critical foundation for any transformation efforts

  • 78 Global Automotive Supplier Study 2018.pptx

    The cultural mindset has to be rethought along with the transformation of the business model

    Transformation

    Future

    Past

    Focus on methods, processes and tools

    Incremental processes

    Tactics and pressure as drivers

    Change of working style

    Implementation of defined changes

    Status Quo

    Addressing existing mindsets and beliefs

    Strategy-driven

    Many connected initiatives

    Reconfiguration and reinvention

    Change of framework

    Result of many changes

    Solution-driven Problem orientation

    Limited initiatives

    Project orientation Influence on the whole organization

    Flat hierarchy, agile decisions

    Top-down decisions

    Motivation as driver

    Illustrative Cultural mindset transformation

    Source: Lazard, Roland Berger

    Cultural mindset 8

  • 79 Global Automotive Supplier Study 2018.pptx

    Suppliers need to rethink their business model in order to be successful in the future

    1 Suppliers need to rethink their strategy and product portfolio in order to capture growth opportunities or consolidate the market around their existing portfolio

    3 Suppliers need to implement a new and lower operating cost base and at the same time ensure sufficient financing for the upcoming transition

    4 Suppliers need to build up new competencies and capabilities and adapt their organizational structure & governance as well as cultural mindset to compete in the new technology areas

    5 Suppliers need to build up new partnerships and leverage this ecosystem to find new ways to innovate

    New

    bu

    sin

    ess

    mo

    del

    2 Suppliers need to define a long term technology roadmap as well as their strategic positioning in the value chain regarding their product and service offering

    Summary: Key actions for automotive suppliers

    Source: Lazard, Roland Berger

  • 80 Global Automotive Supplier Study 2018.pptx

    Contents

    This document shall be treated as confidential. It has been compiled for the exclusive, internal use by our client and is not complete without the underlying detail analyses and the oral presentation.

    It may not be passed on and/or may not be made available to third parties without prior written consent from and .

    Roland Berger/Lazard

    The status

    Record volumes and profits, but key markets are at a tipping point

    A The consequence

    Automotive suppliers need to transform their business models

    D

    Roland Berger and Lazard Automotive teams

    The Contacts

    E The challenge

    Suppliers' traditional business will be questioned on multiple levels

    C The future

    Upcoming automotive disruption will fundamentally change the industry

    B

  • 81 Global Automotive Supplier Study 2018.pptx

    Please contact us for further information

    Source: Lazard, Roland Berger

    Dr. Eric Fellhauer Managing Director

    +49 69 170073-733 eric.fellhauer@lazard.com

    Marcus Berret Partner

    +49 89 9230-8737 marcus.berret@rolandberger.com

    Michael Schmidt Director

    +49 69 170073-51 michael.schmidt@lazard.com

    Martin Bodewig Principal

    +1 312 662 5529 martin.bodewig@rolandberger.com

    Christof Sndermann Director

    +49 69 170073-221 christof.soendermann@lazard.com

    Felix Mogge Partner

    +49 89 9230-8346 felix.mogge@rolandberger.com

    Authors of this study

  • 82 Global Automotive Supplier Study 2018.pptx

    China

    6 Partners 70 Consultants

    5 Partners 20 Consultants

    India/S. East Asia South America

    2 Partners 10 Consultants

    North America

    4 Partners 30 Consultants

    Western Europe

    20 Partners 150 Consultants

    Eastern Europe

    3 Partners 15 Consultants

    Russia

    1 Partner 10 Consultants

    2 Partners 10 Consultants

    MENA

    Japan/Korea

    6 Partners 25 Consultants

    Roland Berger Automotive: A strong global team with more than 350 consultants dedicated to clients in the automotive industry

    > Global team of more than 350 dedicated automotive consultants

    > Over 400 clients in the automotive industry

    > More than 2,000 successful projects since 2000

    > Proven leading-edge tools and methodologies

    > Thought leadership in the worldwide automotive community, producing highly regarded studies and top quality research

    Roland Berger Automotive: More than 350 dedicated consultants globally

  • 83 Global Automotive Supplier Study 2018.pptx

    Lazard Automotive Practice: Unparalleled coverage of the global automotive sector

    Selected closed transactions with Lazard involvement

    > Anvis: Sale to Tokai Rubber Industries > Chassix: Restructuring of the company > Delphi: IPO of the company > Dongfeng: Acquisition of a minority stake in PSA > Fiat: Acquisition of remaining equity in Chrysler > Gestamp: IPO of the company > Harman: Sale to Samsung > Honsel: Sale to Martinrea/Anchorage > KPS Capital: Acquisition of Bosch Foundation Brakes > Opel: Advising the German Ministry of Economics > Pirelli: IPO of the company > Pirelli: Sale of Camfin stake to ChemChina > TBVC: Acquisition of remaining 50% stake by Freudenberg > TI Fluid Systems: IPO of the company > UAW: Restructuring of OPEB liabilities of GM, Ford, Chrysler > Uniwheels: Sale to Superior Industries > US Treasury: IPO of GM > US Treasury: Sale of Chrysler stake to Fiat > Via: Strategic investment from Daimler > Volkswagen: Acquisition of a 49.9% stake in Porsche > Wahler: Sale to BorgWarner > ZF Friedrichshafen: Acquisition of TRW Automotive

    Asia Pacific1)/ Middle East 8 Managing Directors ~15 bankers

    Europe 9 Managing Directors ~25 bankers

    Americas

    9 Managing Directors ~25 bankers

    Lazard Automotive: ~65 bankers with strong senior expertise in the automotive sector

    1) In Korea, strategic alliance with Lazard Korea

  • 84 Global Automotive Supplier Study 2018.pptx

    Our global automotive supplier database encompasses the financial performance of ~650 companies Valuable tool for benchmarking

    Source: Lazard, Roland Berger

    > Comprehensive detailed supplier financial information clustered by product/domain focus, HQ regions, company size and business model

    > Historical data back to the year 2000 on ~650 automotive suppliers from triad markets as well as from emerging countries

    > Evaluation of historical performance against industry in more than 50 relevant financial KPIs

    > Identification of best-in-class performance and ability to set relevant profitability targets within relevant peer group

    Global Automotive Supplier Database 2000-2017e

    Supplier_Cockpit

    Company selection BorgWarner Inc.

    Average 2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E

    Revenues

    Revenues Revenues EUR m 2508.6 2229.5 2589.3 2909.9 3342.3 4070.9 4347.4 5052.0 4990.7 3769.8 5359.6 6746.7 6805.3 7049.0 7872.9 7608.1 8600.2 8856.6

    Revenue growth [Revenues t/Revenues t-1]-1 % 8.3% n.a. (11.1%) 16.1% 12.4% 14.9% 21.8% 6.8% 16.2% (1.2%) (24.5%) 42.2% 25.9% 0.9% 3.6% 11.7% (3.4%) 13.0% 3.0%

    Costs

    Costs of sales [Costs of sales/Revenues] % 76.3% 75.7% 76.6% 74.7% 75.6% 76.5% 74.2% 75.9% 77.2% 78.6% 78.9% 76.3% 76.2% 75.8% 74.9% 74.9% 74.9% 74.4% 78.2%

    SG&A expenses [SG&A expenses/Revenues] % 6.7% 5.0% 5.5% 11.1% 6.5% 6.1% 7.8% 6.8% 6.0% 6.3% 7.4% 6.7% 5.3% 5.1% 4.5% 4.4% 4.7% 5.2% 9.2%

    R&D expenses [R&D expenses/Revenues] % 3.9% 4.2% 4.4% n.a. 3.9% 3.5% 3.7% 4.1% 4.0% 3.9% 3.9% 3.3% 3.4% 3.7% 4.1% 4.0% 3.8% 3.8% 4.1%

    Profitability

    EBITDA margin [EBITDA/Revenues] % 14.8% 15.1% 13.4% 14.2% 14.0% 13.9% 14.3% 13.3% 12.8% 11.1% 9.8% 13.7% 15.1% 15.4% 16.5% 16.7% 16.6% 16.6% 16.9%

    EBIT margin [EBIT/Revenues] % 10.0% 9.6% 7.2% 9.2% 8.8% 8.8% 8.3% 7.7% 7.8% 5.7% 3.2% 9.2% 11.1% 11.4% 12.4% 12.7% 12.6% 12.3% 12.6%

    ROCE [EBIT/Capital employed] % 16.4% 13.5% 7.4% 11.5% 10.8% 12.2% 11.1% 10.9% 12.4% 9.1% 4.0% 14.8% 20.2% 20.3% 21.8% 23.1% 18.1% 20.7% 30.7%

    Investments

    Capital expenditures [Capital expenditures/Revenues] % 6.0% 6.3% 6.0% 6.1% 7.0% 7.2% 6.8% 5.9% 5.5% 7.0% 4.3% 4.9% 5.5% 5.7% 5.6% 6.8% 7.2% 5.5% 5.6%

    Reinvestment level [Capital expenditures/Depreciation] % 145.0% 163.5% 135.2% 153.7% 172.2% 181.8% 130.7% 112.2% 120.9% 142.4% 73.3% 123.2% 156.1% 156.6% 153.2% 185.7% 191.8% 142.6% 132.6%

    Net working capital

    Working capital [Working capital/Revenues] % 8.6% n.a. 3.3% 6.3% 9.0% 9.4% 10.5% 11.3% 9.7% 9.2% 8.8% 8.7% 8.3% 8.0% 7.3% 8.8% 11.5% 8.4% n.a.

    Days sales [Receivables/Revenues]*360 days 48.7 n.a. 26.1 32.7 43.9 51.0 47.5 52.3 48.8 35.7 57.4 54.7 52.5 50.9 51.7 52.0 63.8 57.4 n.a.

    Days payables [Payables/(Revenues-EBITDA)]*360 days 49.9 36.9 41.8 39.5 40.9 46.3 44.0 48.4 50.6 37.7 60.1 59.0 53.6 52.9 57.1 51.0 65.9 63.0 n.a.

    Days sales in inventories [Inventories/Costs of sales]*360 days 33.8 29.0 28.7 31.8 31.2 29.8 37.5 40.0 39.2 39.2 36.1 35.9 30.2 29.6 29.6 29.3 43.4 34.2 n.a.

    Fianncing

    Equity ratio [Euity/Total assets] % 42.2% 37.4% 37.5% 34.1% 41.5% 43.5% 40.2% 40.9% 46.8% 43.2% 45.4% 40.7% 40.1% 48.2% 51.5% 50.0% 40.3% 36.4% 40.7%

    Leverage [Net debt/EBITDA] multiple 1.9x 2.0x 3.8x 3.1x 2.8x 2.1x 2.6x 2.2x 1.6x 2.2x 2.6x 1.6x 1.4x 0.9x 0.6x 0.7x 1.5x 1.4x n.a.

    Gearing [Net debt/Equity] % 65.2% 71.9% 107.5% 121.1% 97.4% 67.2% 95.5% 71.4% 45.7% 64.3% 46.6% 55.4% 63.6% 30.7% 19.3% 26.5% 57.4% 67.3% n.a.

  • 85 Global Automotive Supplier Study 2018.pptx

    This presentation was prepared by Lazard & Co. GmbH ("Lazard") and Roland Berger GmbH ("RB") exclusively for the benefit and internal use of our clients and solely

    as a basis for discussion of certain topics related to the automotive supplier industry described herein. This presentation is strictly confidential and may not be

    reproduced, summarized or disclosed, in whole or in part, without the prior written authorization both of Lazard and RB, and by accepting this presentation you hereby

    agree to be bound by the restrictions contained herein.

    This presentation is based on publicly available information that has not been independently verified by Lazard or RB. Any estimates and projections contained herein

    involve significant elements of subjective judgment and analysis, which may or may not be correct. Neither Lazard, nor any of its affiliates, nor any of its direct or indirect

    shareholders, nor any of its or their respective members, employees or agents nor RB provides any guarantee or warranty (express or implied) or assumes any

    responsibility with respect to the authenticity, origin, validity, accuracy or completeness of the information and data contained herein or assumes any obligation for

    damages, losses or costs (including, without limitation, any direct or consequential losses) resulting from any errors or omissions in this presentation.

    The economic estimates, projections and valuations contained in this presentation are necessarily based on current market conditions, which may change significantly

    over a short period of time. In addition, this presentation contains certain forward-looking statements regarding, among other things, the future financial performance of

    automotive suppliers which may include projections based on growth strategies, business plans and trends in the automotive sector and global markets. These forward-

    looking statements are only predictions based on current expectations; the actual future results, levels of activity and/or financial performance of automotive suppliers

    may differ materially from the predictions contained in this presentation. Changes and events occurring after the date hereof may, therefore, affect the validity of the

    statements contained in this presentation and neither Lazard nor RB assumes any obligation to update and/or revise this presentation or the information and data upon

    which it has been based.